The Federal Government have released the second tranche of legislation to enact the changes proposed in the Federal Budget.  This round primarily deals with the carry back of tax losses for companies.  The trust taxation changes are still to be released.

In simple terms, the rules enable a company to carry back losses to earlier profitable income years to generate a refundable tax offset. The proposed commencement date is income years starting on or after 1 July 2026 and therefore this means the rules have application to the 2026/27 income year.  Practically, this means that the 2024/25 and 2025/26 income years are years into which a loss can be carried back.

 

Eligibility

The carry back provisions are not available to Significant Global Entities (SGEs).  The company must:

• Have incurred a tax loss in the relevant income year;
• Have had an income tax liability in at least one of the two previous income years (an “eligible carry back year”);
• Have lodged income tax returns (or have had assessments made, or not been required to lodge) for the relevant income year and each of the five preceding income years; and
• Make a formal choice to claim the offset (a “loss carry back choice”).

 

Eligible tax losses

• Only current year revenue losses are eligible for carry back. Capital losses cannot be carried back.
• Certain losses are ineligible for carry back such as losses transferred to the head company of a consolidated group when an entity joins that group and losses that arise from excess franking credits.

 

Calculating the offset

The amount of the refundable tax offset is worked out as follows:

• Identify the amount of the loss being carried back to that year.
• Reduce that amount by any net exempt income for that carry back year (to the extent not already used).
• Multiply the resulting amount by the entity’s corporate tax rate for the loss year to arrive at a “tax-equivalent amount”.

 

The offset component for each carry back year is then limited to the lesser of that tax-equivalent amount and the entity’s actual income tax liability for that year.

The total offset across all carry back years is further capped at the entity’s franking account balance at the end of the loss year.

The loss carry back system is optional. Companies can choose to carry the loss forward to offset against future profits should it so choose.

Franking account limitation

The loss carry back tax offset is capped at the entity’s franking account surplus at the end of the loss year.  This is designed to prevent double access to franking credits with a carry back and a franked dividend as well as avoiding Franking Deficit Tax.

The receipt of the tax refund results in a debit to a company’s franking account on the day of receipt and therefore the franking account will still need to be monitored to ensure that it remains in credit after the refund is received.

Here are some examples that have been provided by Treasury which show how this will apply – click on the link here to read more

• Example 1 Business benefits from temporary loss carry back
• Example 2 Carrying back losses to multiple years but offset is limited by franking credit amount

If you have any questions relating to Loss Carry Back and your individual circumstances, please don’t hesitate to contact your ESV Engagement Partner.